Market report.

Russia Engenders New Domino Threat

August 29, 1998|By Bill Barnhart.

The severe financial stress in Japan, the world's second-largest economy, has troubled U.S. financial markets for years but did not prevent repeated rallies to record highs in major U.S. stock indexes.

Yet the latest debacle in crisis-prone Russia, a nation with economic output less than one-tenth of U.S. gross domestic product and little trade with this country, appears to have sparked one of the worst stock market slides of the decade.

The importance of Russia to the rest of the world cannot be measured in economic output or the market value of its tradable assets. Some wags have suggested that Microsoft Corp. Chairman Bill Gates, the world's richest man, who has been selling Microsoft shares recently, could buy Russia and remove this annoyance from the world stage.

There are three reasons that Russia matters greatly in the current global financial picture:

- First, the legacy of the Soviet Union--a bellicose regime that inspired the non-communist world to spend heavily on arms for more than four decades, lingers in Russia in the form of nuclear weapons and communist politics.

Inside Russia, advocates of a so-called command-and-control economy, many of them deposed Soviet-era bureaucratic powerbrokers, are eager to reassert Soviet-style communism as an alternative model for the world.

Democratic principles remain experimental and largely untrusted in Russia. A resumption of militaristic communism could swiftly erode the peace dividend the United States and Europe have invested successfully in bringing fiscal discipline to their economies.

- Second, despite its insignificant economy, Russia is one of the world's great storehouses of natural resources, such as oil, gold and aluminum. Russia's desperate need for cash may prompt it to flood world commodity markets with its resources, regardless of the effect on prices.

Global price deflation, already threatened in many natural resource-dependent countries, including U.S. neighbors Canada and Mexico, could obliterate for years the primary growth opportunity for American industries facing mature markets at home.

- Third, in defaulting this month on interest payments owed to foreign lenders, Russia declared its refusal to play by the rules of global capitalism. More than the threat of resurgent communism or the prospect of global deflation, Russia's bold snub to foreign bankers caused a virtual tantrum in financial markets this week.

Russia is not alone in this respect. Hong Kong, Asia's most widely respected bastion of free-market capitalism, recently took government action to support the country's sagging stock market.

International financiers, who almost unanimously maintain their right to shift money from country to country with no regard for the social impact of their decisions, cry foul when governments impede that process through defaults or market intervention.

Because no one has devised a better system than unfettered capitalism, the bankers have the upper hand in the argument. Russia's default not only wounds private bankers but also challenges international lending agencies, notably the International Monetary Fund, which exist to smooth over dangerous economic disruptions, even if it means protecting foolish bankers from themselves.

The Soviet threat may be gone. But the new domino theory arising from Russia asks, Which emerging economy, whose economic growth prospects attracted eager bankers and mutual fund investors in years past, will be the next to shun its foreign creditors and shareholders?